Name: ____________________________________________

Economics Dr. Sauer

Homework #4 (50 points) For questions 1 40 (40 points), please indicate your answers on a scantron sheet. It is okay to work on your homework in groups, but each person must submit answers individually. For questions 41-44 (10 points), you may tear off that sheet to hand in. 1. True or False. Deflation can actually be a worse problem than inflation. 2. Which of the following is NOT correct about the Fed? a. has the job of fostering sustainable growth in the US economy. b. controls the nations money supply. c. is responsible for fiscal policy. d. controls the nations credit tap. 3. True or False. When the Fed creates new money, in order to inject it in to the economy, it delivers cash to banks who then distribute it. 4. Which of the following is correct with respect to the discount rate and federal funds rate? a. The discount rate is the rate that banks charge each other. It is directly controlled by the Fed. b. The federal funds rate is rate that the Fed charges to banks. It is directly controlled by the Fed. c. The discount rate is the rate that the Fed charges to banks. It is indirectly controlled by the Fed. d. The federal funds rate is the rate that banks charge each other. It is indirectly controlled by the Fed. 5. True or False. When inflation gets too high, the Fed may choose to cause a recession in order to decrease the inflation. 6. Which of the following is a correct example of a function of money? a. Josh pays for his rental car using cash. For Josh, money fulfilled the function of storing value. b. Caroline opens her Visa bill and sees that she owes $532. For Caroline, money fulfilled the function of serving as a unit of account. c. At the end of fall, Raul gets out his winter coat from the back of the closet. He finds $20 in the pocket. For Raul, money fulfilled the function of a medium of exchange. d. Pasha purchases a fancy sports car. He is using money as a status symbol. 7. True or False. Because paper currency is not backed by gold (or another precious metal) it does not have value. 8. The basic structure of the Fed includes a. democratically elected representatives to serve on the executive board, a chairman and miscellaneous committees as needed. b. a board of governors, a chairman, a committee that makes monetary policy, and regional banks. c. appointed representatives to serve on the executive board, a chairman, and regional banks. d. a board of governors, a chairman, a committee that makes monetary policy, and a committee that makes fiscal policy. 9. In response to the financial crisis, the Fed a. raised interest rates. b. lowered interest rates. c. borrowed money directly from banks. d. lowered taxes. 10. True or False. When it comes to controlling inflation, economists say that whether a central bank is independent or whether it is controlled by a political party doesnt make much difference in the long run. 11. True or False Economically speaking, a strong currency is preferred to a weak currency. 12. With respect to exchange rates a. the nominal exchange rate takes into account inflation. b. the real exchange rate is the official exchange rate. c. a countrys currency has appreciated if it can buy more of another currency. d. a countrys currency has depreciated if it can buy more of another currency.

13. Which of the following is NOT a type of exchange rate system a. Fixed exchange rate (also called pegged). b. The Gold Standard. c. The use of a currency board. d. Barter System. 14. True or False The World Bank and International Monetary Fund were created for the purpose of ensuring a stable financial system after World War II. 15. A currency crisis usually has 3 parts: the country attracts foreign capital, something bad happens, foreign investors take their capital elsewhere. The reason that Iceland attracted an influx of foreign capital was a. high interest rates. b. relatively heavily regulated banks. c. corrupt government officials. d. its adoption of the euro. 16. When a countrys currency is weak a. its exports decrease. b. its imports increase. c. it is cheaper for foreigners to travel to that country. d. it is cheaper for residents of that country to travel abroad. 17. The value of a floating exchange rate a. is determined by the government. b. is determined by supply and demand of the currency. c. is determined by the nations independent exchange rate board. d. reflects the current price of gold. 18. Purchasing Power Parity a. is used to adjust a currency for inflation. b. is used to make comparisons of purchasing power within a nation. c. is often very close to the official exchange rate. d. can be used to construct the Big Mac Index and tell if a currency is over or under valued. 19. The US has been running a current account deficit with China. This means a. China is running a trade deficit against the US. b. the US is saving more than it is investing. c. the US dollar is likely to appreciate versus the Chinese currency. d. the US is borrowing from China. 20. A fixed exchange rate system a. has the benefit of instability and uncertainty for investors and international traders. b. has the benefit of being determined by market forces. c. has a drawback of being vulnerable to speculative attacks (e.g. Soross attack on the British pound). d. has a drawback of being tied to the value of gold. 21. True or False The basic principles of economics change when looking at the global economy instead of domestic economy. 22. The concept of ___________ means producing at the lowest cost and the concept of ____________ means producing the good for which we have the highest productivity. a. strict advantage; relative advantage. b. relative advantage; strict advantage. c. absolute advantage; comparative advantage. d. comparative advantage; absolute advantage. 23. True or False Trade barriers are generally good for consumers.

24. Which of the following is the correct train of logic? a. Because we are a rich nation, we are productive. Productivity allows us to specialize. Specialization is what allows us to trade. b. Trade allows us to specialize. Specialization increases productivity. Productivity makes us richer. c. Specialization allows us to trade. Trade allows us to increase productivity. Productivity makes us richer. d. Because we are a rich nation, we are specialized. Specialization increases productivity. Productivity makes us richer. 25. True or False The world is becoming more interdependent. 26. Which of the following is not a typical benefit for poor countries who trade with rich nations? a. The poor country gains access to a market with many wealthy consumers. b. The poor country grows its export sector, which leads to more growth within the country. c. The poor country experiences environmental degradation as a result of increased economic activity. d. The poor country begins to be lifted out of poverty. 27. True or False When people who live in areas with sweatshops are interviewed, they typically express concern and disgust for the working conditions and pay. 28. Trade is based on voluntary exchange. Economists would use this principle when explaining a. why there is a Hooters restaurant on the lovely ocean-front promenade in Puerto Vallarta. b. why people in developing countries do not want to work in sweatshops. c. why governments enact trade barriers. d. how the benefits of trade exceed the costs. 29. True or False Preferences change with income, especially regarding the environment. 30. Which of the following is NOT correct with respect to protectionism? a. It helps protect jobs in the short run. b. It refers to trade barriers that limit foreign competition. c. It is harmful to the economy in the short run, but good for the economy in the long run. d. It prevents creative destruction due to international trade. 31. True or False The vast majority of rich nations are located outside the tropics. 32. When a nation has endowments of natural resources a. the nations economy is very likely to grow and prosper. b. the nations economy may actually end up suffering from the Dutch disease. c. it grows faster than nations without natural resources. d. it tends to have higher GDP per capita than nations without natural resources. 33. True or False Because economists have a clear understanding of what makes rich nations rich, it is straightforward to make a poor economy rich. 34. Economists say that good governance matters for economic growth. Which is typically NOT an example of good government? a. responsible fiscal and monetary policy. b. effective and non-corrupt government institutions. c. a large number of regulations. d. the protection of property rights. 35. True or False Poor countries that are open to international trade tend to grow faster than poor countries that restrict international trade. 36. A problem for developing nations is the human capital trap which is a situation where a. individuals cannot afford to build their human capital and are trapped in low-skilled jobs. b. there are few skilled workers so the incentive to become skilled is lower. Skilled workers migrate out of the area. c. there are so many individuals who want to become educated that the school system cannot keep up. Individuals are forced to migrate to a different area to gain access to education. d. once an individual becomes skilled, there is not enough physical capital for them to work with.

37. One of the pieces of evidence that leads economists to the conclusion that democracy is good for the economy is the absence of ________________________ in any democratic nation. a. floods. b. riots. c. famine. d. malaria. 38. It is not surprising that war is bad for an economy. The proportion of the worlds billion poorest people that are either in an area with an active civil war or who have recently been through one is a. 10%. b. 25%. c. 50%. d. 75%. 39. When women are allowed to fully participate in the economy a. income growth is higher. b. inflation is higher. c. unemployment is higher. d. fertility rates are higher. 40. True or False Economists agree that rich nations giving foreign aid to developing nations is the way to break the poverty trap. ____________________________________________________________________________________________________

Name: ___________________________________________

41. Suppose a bank has $25,000,000 in deposits and the reserve requirement ratio is 10%. a. Calculate how much money this bank must keep on hand.

b. Calculate how much money this bank can lend out if it chooses.

42. You are on vacation in Japan and are out at a restaurant. You receive your bill for 2,000. Yikes thats a lot of money!!! Or is it? You remember that the exchange rate is 77.2200 yen per dollar. How much does your meal cost in terms of US dollars?

43. Examine the labels of your possessions to see where each was made. Complete the following chart. Item Clothing 1. 2. 3. Toiletries (e.g. deodorant, make-up, soap) 1. 2. 3. Electronics 1. 2. 3. Food 1. 2. 3. Explain the patterns that you notice. Country Origin

44. Explain some reasons it is hard for a poor nation to become rich.